Its a through complete analysis of ‘THE ECONOMIC CRISIS OF INDIA- 1991”

1. REPORT ON
‘THE ECONOMIC CRISIS OF INDIA-
1991”
SUBMITTED BY-
ANKUSH SINHA RAY
1120008
DMBA-1 SEC B
KIIT UNIVERSITY

2. In 1991, in the wake of an exceptionally severe balance of
payments crisis. The need for a policy shift had become
evident much earlier, as many countries in east Asia
achieved high growth and poverty reduction through policies
which emphasized greater export orientation and
encouragement of the private sector. India took some steps
in this direction in the1980s, but it was not until 1991 that
the government signaled a systemic shift to a more open
economy with greater reliance upon market forces, a larger
role for the private sector including foreign investment, and
a restructuring of the role of government. The government
was close to default, its central bank had refused new credit
and foreign exchange reserves had reduced to such a point
that India could barely finance three weeks’ worth of
imports. India had to airlift its gold reserves to pledge it with
International Monetary Fund (IMF) for a loan. This report
discusses about what led to the crisis, how it was controlled
and what were the measures taken to permanently reform
the economic policy of the country.

3. What actually happened ?
A Balance of Payments crisis in 1991 which pushed the country to near
bankruptcy. The Rupee devalued and economic reforms were forced
upon India. India central bank had refused new credit and foreign
exchange reserves had reduced to the point that India could barely
finance three weeks’ worth of imports
1. Almost all countries in the world depend on the global economy for a
wide variety of things. For India, we depend on West Asia for our oil,
South Africa for our gold, US for our technology, South east Asia for
vegetable oil etc. To buy these items from the world market, we
need US dollars - the global currency of trade. The only way to earn
dollars is by selling enough of our stuff in the global economy
(exports).
Since 1960s, India depended on the Soviet Union for our exports - as
we failed to develop good economic relationships with the US and
Western Europe. In late 1980s, Soviet Union started to crack and
by 1991they were split into 15 nations (Russia, Kazakhstan, Ukraine,
etc). Now, India had a major problem because our primary buyer was in
turmoil. Exports were down significantly.
2. Meanwhile, there was Saddham Hussain who had his misadventure
into Kuwait in 1990. This led US to war with Iraq in early 1991. Oil fields
started to burn and ships found it hard to reach Persian gulf. Iraq and
Kuwait were our big suppliers of oil. The war led to destruction of our
oil imports and the prices shot up substantially - doubling in a few
months. Gulf War and 1990 oil price shock.

4. 3. In the late 1980s India's political system was imploding. Prime
Minister Rajiv Gandhi was involved in a series of troubles - Bofors
scandal, IPKF misadventure, Shah Bano case that eventually led to his
ousting in 1989. What followed were two more terrible leaders who
were as unstable as they were incompetent. This had a huge effect on
Indian economy that was totally forgotten in the political crisis.
in 1991 this stop-gap government crashed. Until Narasimha Rao was
sworn as Prime Minister in 1991, Indian economy was left in gross
neglect.
Thus, 1991 was the year of perfect storm. This triple crisis brought India
on its knees. On the one end, our primary buyer is gone. On the other
hand, our primary sellers were in war. In the middle, our production
was effectively stopped by political crisis. We were running out of
dollars to buy essential items like crude oil and food from the rest of
the world. This is termed a "Balance of Payments Crisis" - meaning
India was not able to balance its accounts - exports were significantly
less than imports.
Since, we didn't have many dollars, we went and begged the IMF - the
pawn shop of the world. They asked us to pledge our gold reserves in
return for the interim loan of $3.9 billion (a huge sum for India then)
just as the neighborhood moneylenders ask for our gold when we want
an emergency loan. We took 67 tons of our gold in two planes - one to
London and other to Switzerland to get this assistance.

5. Indian policy response to economic crisis
Liberalisation : It means to free the economy from direct or physical
controls imposed by the government. Prior 1991, government had
imposed several types of controls on Indian economy e.g. industrial
licensingsystem, price control or financial control on goods, import
license, foreign exchange control, restriction on investment by big
business houses, etc.
India began its "liberalization" when Rao became our Prime Minister on
21st June 1991. Essentially it was the undoing some of the policies that
Nehru and his family put in place in our country.
1. We did away with many of the import restrictions. Until 1991, we
imposed a 400% customs duty on many products. Industries had to
beg to get an essential ingredient imported. By 1991, the duties on
many products were reduced substantially. This brought new growth
in our industries.
2. Import licensing was abolished. Until 1991, you need a license to
import anything and this license was very hard to get.
3. Government did away with the production licensing in many
industries. Until 1991, you needed government's permission in what
to produce and how much to produce. In one stroke, the restriction
was removed in many industries.
4. Rao put domestic economic back on track with two stars - Montek
Singh and Manmohan Singh. Huge spur was given to our local
industries. Stock market rules were relaxed.
5. Manmohan abolished "gold smuggling" (remember 1980s Bollywood
movies?) in one go. He effectively allowed Indian expats to bring
back 5 kilos of gold with them with no duty. Now, nobody had a
reason to smuggle gold & electronics.

6. 6. Singh and Rao allowed foreign investors to come. Until then India
was living in the paranoia of East India company. Many sectors were
opened for foreign investment and collaboration. Now, companies
like Coke and Nike could come in. Suddenly, Bombay Stock Exchange
found a life.
7. Government started selling some of its businesses to the private.
This brought cash and new round of efficiency.
8. Industrial de-licensing followed shortly afterward. Industrialists
could finally breathe free of the License Raj. Narasimha Rao
announced the de-licensing on the same day that Manmohan Singh
presented his budget. Before anyone knew it, industrial licensing
was abolished.
9. The MRTP Act (that protected businesses from monopolies) was
reformed and India could finally be on the path to producing
competitive and productive industries.
10. Gradual reduction of import duties followed, allowing foreign
investments to slowly start flowing in. More clearance was given to
capital goods.
11. Slowly, taxes were lowered (income and corporate taxes) and
Foreign Technology Agreements started getting signed.
12. In cities where the population was less than a million, they didn't
even need Government permits for industries.
13. The threats of massive layoffs were avoided by legislating
judiciously and exercising regulations carefully
The role of Narasimha Rao and Manmohan Singh:
The result of all this was that Licensing slowly became the exception
rather than the rule. Every industry (except two) was opened to
private sectors. Foreign technology was accepted liberally and

7. foreign investment was allowed in a large number of industries. The
monopoly laws were revised and there was no more restrictions on
companies wanting to grow big.
Narasimha Rao and Manmohan Singh, basically braked with careful
deregulation and accelerated by reducing bottlenecks.
They had to continually assure every worker striking (from the banking
sector to farmers, from opposition Yatras led by the BJP to the trade
unions) that there wouldn't be layoffs and that workers would be
protected. These reforms were both revolutionary and incremental.
Effects of the new economic policy:
The result of this was that the Indian economy grew to 7.5% of GDP
(from USD 130 million in 1992, to USD 5 billion, in 1996).

8. Cities started to grow and became centers of post-liberalization
industrialization. Atal Bihari Vajpayee continued with Manmohan
Singh's economic reforms and India welcomed IT and BPOs. Manmohan
Singh's government in 2004, again continued with market liberalization
and larger role for enterprises.
India's capital markets found exponential growth. The number of listed
companies grew and resulted in a healthy trend of development in
India. Even though there are serious environmental impacts to India's
growth story, India found a unique brand of capitalism (a form of
laissez-faire capitalism very different from the free-form capitalism in
USA or China).

9. The Narasimha Rao government ushered in several reforms that are
collectively termed as liberalisation in the Indian media. Although, most
of these reforms came because IMF required those reforms as a
condition for loaning money to India in order to overcome the crisis.
There were significant opposition to such reforms, suggesting they are
an "interference with India's autonomy". Then Prime Minister Rao's
speech a week after he took office highlighted the necessity for
reforms, as New York Times reported, "Mr. Rao, who was sworn in as
Prime Minister last week, has already sent a signal to the nation—as
well as the I.M.F.—that India faced no "soft options" and must open the
door to foreign investment, reduce red tape that often cripples
initiative and streamline industrial policy. Mr. Rao made his comments

10. in a speech to the nation Saturday night." The foreign reserves started
picking up with the onset of the liberalisation policies and peaked to
$314.61 billion at the end of May 2008.
A program of economic policy reform has since been put in place which
has yielded very satisfactory results so far. While much still remains on
the unfinished reform agenda, the prospects of macro stability and
growth are indeed encouraging.
Conclusion
Thus we see how poor macro policies of the government plunged the
Indian economy into a major crisis and disrupted the business
environment, and how subsequent corrective macro policies helped in
the rebuilding of the business environment and put greater resilience in
the Indian economy. The growth spurt prior to 1991 was fragile and
volatile. There was a jump in the growth rate during 1977-79, massive
decline in 1979-80, a jump again in 1980-82, return to the ‘hindu
rate’17 during 1982-88 except 1983-84, climb up again in 1988-91 and
crisis in 1991-92. However, after 1991, the macroeconomic stabilization
policies helped the Indian economy to deliver sustained